Monday’s Wall Street poll revealed one thing: More people are starting to dabble in software. While this sentiment makes sense, and the analysts are not blind to the price action and know the stance is a step off ahead of some important earnings reports, you have to wonder if this is a sign that the rotation away from these stocks and into more cyclical old economy stocks is coming to an end. Cantor Fitzgerald, Morgan Stanley, and Jefferies Workday lowered their price targets. The same goes for UBS’s Autodesk, Stifel, and Morgan Stanley. Morgan Stanley and Jefferies lowered their price targets for Salesforce. BTIG and Stifel did the same for Snowflake. Even cybersecurity isn’t secure, with Stifel targeting CrowdStrike and Wedbush removing Palo Alto Networks from its “best ideas” list. To be clear, most of these companies still view the companies as buys given how their prices are performing relative to their price targets. But it’s clear that Wall Street has finally gotten the message that the premiums once paid for these asset-light businesses will be harder to come by in the age of AI. The Street’s hot new acronym, “HALO,” coined by CNBC’s Josh Brown, embodies a shift away from a market dominated by mostly asset-light FAANG and “Magnificent Seven” groups. This stands for “heavy asset, low obsolescence.” Unlike FAANG or Mag 7, it does not refer to a specific group of stocks. Rather, it refers to any company that investors believe will be resilient to AI pressures, as a simple prompt to a generative AI model will not be enough to counter it. Sure, it might seem fanciful that an AI model could create the next CrowdStrike. But that’s what the market is concerned about at the moment, and it’s a tough tape to fight against. The logic behind HALO makes sense. After all, you can’t prompt an AI to get into a McDonald’s Big Mac or a Starbucks Venti coffee. Nor can we begin manufacturing the natural gas turbines needed to meet the power demands of AI (hello GE Vernova ). The same goes for the fiber optic cables needed to quickly transmit data in AI data centers (a la Corning). But there is a potential problem. Without the tangible benefits of AI to drive margin expansion and associated revenue growth, there are limits to how far investors can push these stocks before the HALO theme becomes little more than a sentiment-driven momentum trade. If your profits aren’t growing but the stock price is going up, you’re just paying more money for the same profits. This means that the stock price will rise and, as a result, the value of your holdings will decrease. Take a look at this chart that examines the valuation dynamics of all 11 sectors of the S&P 500 using their respective State Street ETFs. So what do we see? Energy, industrials, materials, consumer staples, utilities, and healthcare have proven to be clear beneficiaries of HALO trade. All six sectors have seen earnings-based valuations rise over the past six months, reaching levels above the five-year average. Particularly noteworthy is the diversified expansion of the industrial sector, home to companies such as GE Aerospace, Caterpillar, and RTX Corporation, owner of Pratt & Whitney. Not only is it trading above its five-year average, but it’s also at its highest level in three years. The energy sector, led by ExxonMobil and Chevron, is also basically at its highest level in a normal year. Meanwhile, information technology, dominated by Apple, Nvidia and Microsoft, and communications services, in which Meta and Google parent Alphabet are the biggest players, have fallen below their respective five-year averages in the past six months. Meanwhile, the consumer discretionary sector, dominated by Amazon and Tesla, has also seen declines in stock prices, but has improved compared to the past five-year average. That makes sense, considering it’s the most HALO-like of the group. Amazon may be lumped in with the tech industry, but it owns tons of warehouses, data centers, and even grocery stores, making it a real asset. The same goes for finance, with investors wondering how much of their operations could be disrupted by AI. What exactly does this mean? The big takeaway is that this rotation may be starting to take off. The valuations of traditional long-term growth market darlings have been compressed, and the valuations of newly anointed cyclical stocks have stagnated. That’s exactly why Jefferies analysts downgraded Deere stock on Monday, after the stock has risen more than 40% since the beginning of the year. However, note that while these valuations are based on FactSet estimates, the issues plaguing the market are fear and distrust. Specifically, investors are concerned that earnings projections are too high for companies that could be disrupted by AI. In other cases, estimates may be too low for companies that can leverage AI to increase efficiency and increase profits. Uncertainty about the future creates distrust in earnings multiples. This means that while tech stocks look cheap based on current estimates, with HALO trading at a premium to historical valuations, investors are less convinced. If you cannot trust the financial metrics on which your valuation is based, then your valuation is inherently unreliable. To be clear, I’m not saying this estimate is definitely garbage. We just acknowledge that fear grips the market. Our rebound is that when fear is controlling price action, it generally means the market is overshooting fundamentals to the upside or downside. We see this even when fears of AI disruption are justified. This is where we end up. Even with the estimates of the problem, the magnitude of the move means investors who want to put their money to work should look for opportunities in rougher areas of the market. It’s never safe to catch a falling knife, so it may be premature, but I’d like to have the idea in mind the moment it looks like the bottom might actually continue, or the moment they start crawling up on good news (or, perhaps more importantly, they at least stop going down on bad news). At the same time, those looking to lighten their mood should consider one of the stocks riding the HALO wave. We’re not looking for a rock bottom in technology, nor are we looking for a peak in the HALO industry. However, when such movements and bifurcations occur, they tend to overshoot. This moment is made for stock picking, and perhaps requires a slightly more subtle approach that goes beyond the science of relying on quotes. In a market prone to exaggerated movements, investors need to take a step back and focus on individual stocks. Just as it would be to claim that all existing software vendors will be obsolete within five years (although price trends might lead you to believe so), it is naive to say that enterprise software is okay. Instead, take a holistic look at your business and ask yourself whether it really makes sense that generative AI models could replace or essentially destroy these businesses in a meaningful enough way to justify inventory destruction. If the answer is no, we think the cybersecurity names CrowdStrike and Palo Alo Networks fit the bill, then perhaps you’ll find a time to buy. Salesforce, which we’ll be reporting on Wednesday night, is certainly in a bit more trouble at the moment. That application is mission-critical to the sales and marketers who use it. But for the enterprise as a whole, they are not as important as cybersecurity. Additionally, they are more open to disrupting seat-based licensing models and do not require the same network effects that aid clients’ cyber defenses. It is also important to tread carefully, as fear-driven markets can remain irrational for longer than they can remain solvent. At the same time, unless these HALO names can actually grow revenue, there is a limit to how high they can bid. Understandably, conversions from software may cost more than a reasonable investor would consider appropriate. So, you want to keep your profits, but you don’t want to play hero by making big calls in either direction. Ultimately, this market reminds us of these two things. The benefit of being a stock picker is that it gives us the luxury of being able to go to companies one by one and ask the important questions: how likely is their business model to be disrupted? — even if we cannot answer it in a quantifiable way beyond scenario analysis through financial modeling. The importance of diversification. The market darlings turned into ugly ducklings so quickly that it’s probably a fantasy to think they could have focused on software and technology and moved into cyclical stocks before they took a hit. Diversification may be harmful during periods of concentrated winners, but it is the key to protecting against software destruction. If you only own software, think about how much that portfolio will shrink over the next few weeks or months. As we edge this market, we intend to focus on individual fundamentals with diversification in mind. In the coming weeks, we’ll narrow down the winners of multi-year moves and look for bargains in stocks of companies that appear to be on their deathbeds. (See here for a complete list of Jim Cramer Charitable Trust stocks.) As a subscriber to Jim Cramer’s CNBC Investment Club, you will receive trade alerts before Jim makes a trade. After Jim sends a trade alert, he waits 45 minutes before buying or selling stocks in his charitable trust’s portfolio. 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